China's fledgling auto industry faces challenges

The Chinese automotive industry faces a number of significant challenges as it continues its expansion, according to a recent study by the U-M Transportation Research Institute (UMTRI) and IBM Corp.

"The need to adapt to a market economy, a lack of technology and knowledge transfer from joint ventures, and infrastructure, air quality and oil supply challenges all combine to create an uncertain future for the Chinese automotive industry," says researcher Bruce Belzowski of UMTRI's Automotive Analysis Division.

The study, "Inside China: The Chinese View Their Automotive Future," provides an insider's view from Chinese automotive, government and academic experts on potential challenges for the fast-growing Chinese auto industry. Belzowski and colleague Jimin Zhao of the School of Natural Resources and Environment interviewed experts in China last spring.

According to the study, improved sales and service are needed to facilitate anticipated growth. A major issue concerns vehicle-financing policies. In 2003, the Chinese government restricted the number of auto loans because of a large number of defaults, although some manufacturers now are allowed to create their own financing units.

Building a quality car-dealership network that not only sells cars but also becomes a reliable source of service for car owners is another area of focus. Currently, customer satisfaction at dealership locations varies significantly. Respondents in the study agreed that China's new marketplace gives all players an opportunity to leverage the dealership experience to create lasting relationships with customers.

"Many vehicle manufacturers are coming to China with a clean slate," Belzowski says. "Working with the Chinese government, they have an opportunity to create an environment that will take all the lessons learned in their home markets and apply them to a brand new model. The companies that are able to execute these new models and develop a keen understanding of the Chinese consumer are in a better position to retain a customer for life."

With dramatic growth taking place, the Chinese government is attempting to manage the transition to a market economy, the researchers say. For example, a Chinese company that wants to produce vehicles in China may not form a partnership with a foreign company that will own more than 50 percent of the venture. In part, this restriction and others like it were put in place to facilitate growth of Chinese research, development and manufacturing knowledge.

The study also found that international joint ventures have not transferred technology and knowledge to their Chinese partners as much as expected, in part because foreign partners may be concerned that the Chinese will use the transferred knowledge to compete with them in the future. Thus, the skills and experience in research and product development have not grown as fast as Chinese officials expected.

The study predicts an increase in merger-and-acquisition activity aimed at acquiring technology during the next 10 years. A change in relationship terms also is expected with the idea that joint ventures will be replaced with cooperative development deals where both partners invest in development of new brands and cars.

Foreign engineering services firms also should expect a boom in business, according to Belzowski and Zhao. With some Chinese manufacturers racing to develop new engineering and design processes, many are outsourcing the work to engineering firms that offer expertise in key areas and have no competing products. Another area the Chinese are exploring is the increased use of components and technology available from global, tier-one automotive suppliers.

"Though there are significant challenges to the growth of China's auto industry, there are even larger external challenges reported by our interviewees," Zhao says. "China's road infrastructure is quite extensive, but there are poor linkages between rural areas and the major cities, a parking shortage in cities and a need for sophisticated traffic management to speed the flow of traffic.

"There are also significant barriers to improving vehicle emissions in China, including low fuel quality, insufficient government requirements for refineries, poor enforcement of standards and the increased cost of vehicles that meet higher emission standards."

Finally, the researchers say the potential growth of the Chinese vehicle market may have a dramatic effect on the world's future oil supply. China became the world's second-largest oil consumer in 2003 and its third-largest importer of oil in 2004. If the Chinese automotive market reaches the level of countries like the United States, their demand for oil could accelerate the drain on dwindling resources and increase international tension, they say.